Because of the rapid increase in hospital costs, many proposals have been made for stemming the rate of increase including the merger of hospitals and the sharing of hospital facilities. While such arrangements have important implications for the comprehensiveness, availability, and quality of care their ultimate desirability depends to a great degree on the cost saving that result from them. The likely cost savings may be predicted by the use of estimated hospital and departmental cost functions, but the actual performance of such mergers and sharing arrangements may differ from the predicted performance. The objective of the proposed research is to empirically study the nature of hospital and departmental cost functions and to evaluate a set of actual hospital merger and shared service arrangements. The proposed research is composed of three interrelated parts. The first part involves a general investigation of total hospital costs with the objective of developing cost functions that explain well the variations in total cost among hospitals and that are also consistent with a reasonable theory of hospital decision making. The second part primarily involves the evaluation of actual hospital mergers using the cost functions developed in the first part to predict the cost that would have been incurred by the merged hospitals had the merger not taken place. The third part of the proposed research involves the study of the economics of shared services using the same basic methodologies employed in the analysis of mergers. The focus of the evaluation of shared services will be on the individual departments and services of hospitals. The data to be used in the proposed research are from the Hospital Administrative Services, from the American Hospital Association Annual Survey of Hospitals, and from the National Survey of Shared Services.